Casinos: Gaming the Gamers

If you've seen the movie, Ocean's Thirteen, you know how the results of casino games can be rigged. Loaded dice, marked cards, a hidden foot pedal that manipulates a roulette wheel, payoffs to employees, and rigged slot machines. In this movie fantasy, the callous owner of the casino is cheated. In real life, it is more likely the casino's customers will be cheated.

How casinos make money

Individual games at casinos are designed to pay out according to the probabilities set by the "law of large numbers" also known as the "law of averages." However, casino owners are playing an even bigger game, one similar to the hybrid gambling game, Texas hold 'em, that I talked about in "Why Investing Is Always A Gamble."

Hybrid games are casino games that have a parimutuel aspect to them. In hybrid games, players can "psych out" other players and win even when that's against the odds set by the law of averages.

Hybrid games played by casino owners

Casinos want to make as much money off of customers as they can. This means they must get more customers to come in their door and stay than their competitors do. The whole auditory, visual, and spatial design of a casino, along with the drinks and entertainment offered guests is geared towards this end.

For example, while in Las Vegas for a Springsteen show, the "Virtual Reality Geographer" and I sat at an open cafe in the center of a casino and studied what went on around us. I remarked that I'd only played nickel slot machines when I had to kill time. Why? Because I always lost money at them. I figured the house set each slot machine so it would pay out less than people put into it so that the house could collect its "cut."

"That's not right", said the VR Geographer. "As long as the slots conform to the law of averages as a whole, individual machines can be set to pay out differently and they clearly are. You picked the wrong machine."

"What!"

"There's always a slot machine somewhere near every casino exit door that pays out at a higher rate. People passing by see it paying and want to come in the door. People leaving hear the payout and decide to stay and play longer. Try that machine," said the VR Geographer and pointed.

I did. After five minutes my hand hurt and I was bored out of my mind. I was grumbling to myself, "This thing is never going to stop winning." Other people were gazing hungrily at my machine. Stubbornly, I set myself a goal of earning enough on the five-cent slot to pay for our gas home.

Twenty minutes later we left, gas money in pocket. The Virtual Reality Geographer had outsmarted the casino owners.

Cheating at parimutuel games

When it comes to cheating at pure parimutuel games, expectations are nearly everything. In parimutuel betting, cheating isn't done with objects; it's done by tricking the observers of the game.

For example, a horse is doped and can't run as fast as expected. A player in a boxing match gets paid to let himself be knocked out. A con man takes the name of a legitimate business, copies its website, and cold calls investors offering them an expensive investment that is worthless.

This is why the cheating of parimutuel bettors at the track or sports arena by outright fraud has been made illegal. But cheating in investing has not been adequately codified by law. That's because the SEC, FINRA, and investors themselves have not understood that investing is a form of parimutuel betting, not a form of casino gambling.

The idea that the stock market does not need any government regulation is as naive and dangerous as the notion government need not closely watch the activities of Las-Vegas-type casinos. If government didn't scrutinize, greed would succeed. The question is, "What kinds of regulation does investing need?" Certainly not the kind I talked about in "The SEC's Most Misguided Regulation." Next week we'll look at investing scams and one possible cure.